In the fall of 1988 I was twenty years old, and a new economics major at the University of Cincinnati.
I was not a new college student. I had entered university in the fall of 1986 as an English major, then switched to biology, before settling on economics. But anyway, there I was: taking Microeconomics 101 in the fall of 1988.
One of the broad themes of the class was that government bureaucrats and social engineers meddle with the economy at their peril—and the peril of the citizenry. For example, we learned that rent controls, popular among progressives, have the effects of reducing both the quantity and the quality of available housing.
We learned about tariffs, too. Tariffs are often popular for ideological reasons, or when there is a sense that domestic producers have difficulty competing.
Tariffs are not without their positive side. They do benefit a small number of domestic producers and workers. But these limited benefits come at a significant cost.
Tariffs raise prices on foreign-made goods for the obvious reason: this price increase is a direct outcome of the tariff. But tariffs raise prices on domestic-made products, too. This second price increase occurs because domestic producers suddenly face a less competitive environment. All they have to do is maintain their prices just below the artificially raised prices of the tariffed, foreign goods.
A tariff is a tax on consumers, and a wealth transfer device. When tariffs are enacted on foreign steel—to cite one example—consumers pay the “tax” of higher prices. Part of this benefit goes to the government, and part of it serves as a subsidy to domestic steel manufacturers. The government, in other words, is forcing consumers to send more of their money to domestic steel producers than would have been the case without the tariff.
Tariffs can also lower quality (because of reduced competition) and lower aggregate demand (because of higher prices). Tariffs are not a tool for mass, shared prosperity.
I want to emphasize that none of this is cutting-edge economic knowledge. I learned all of this almost 37 years ago, as a twenty-year-old college student. The ill effects of tariffs, are—quite literally—Economics 101.
What is astounding is that we have come to a point where the people running our government seem not to grasp the basics of economics. Yes, I’m talking about the Trump administration.
Is it possible that the basic economic theory I was taught in 1988 is wrong? Anything is possible. But it’s highly unlikely. Moreover, the stated motives for the Trump administration’s tariffs—a 19th-century version of mercantilism in which Americans only manufacture, and purchase nothing from abroad (not even raw materials)—strikes me as ahistorical and utopian. It is based on ideology, not economics.
This is rather like the Biden administration’s previous efforts to force all of us to drive electric cars, even when we didn’t want them. But given the scope of the upcoming tariffs, the Trump administration’s efforts to direct economic behavior from on high could prove far more catastrophic.
If you don’t believe me, consult any economics textbook. Consult Thomas Sowell’s Basic Economics. All of these sources will tell you the same thing.
The Trump administration’s tariff plan is not sound economics, and it is certainly not conservatism. It would be best described as a reckless exercise in wishful thinking.
-ET